The New Framework of the Maquiladora Industry

By Baker & McKenzie
Mexico - Foreign Trade Practice Group

General Aspects
• The Decree will now require, for purposes of the authorization, only the tariff classification for the temporary importation of materials and components, lubricants, oils and packaging materials, but not for the importation of containers and of machinery and equipment.

• This requirement is consistent with the rules and criteria determined by SECON in point 3.2.7 of the “Foreign Trade Rules and Criteria Accord” published in the Federal Official Gazette on July 21, 2006, which sets forth that for purposes of the Maquila and PITEX authorization (now IMMEX), the tariff classification of the goods will include all the goods classified under said tariff classification regardless of the description of the goods authorized in the respective program.

• The Decree now provides for the possibility for IMMEX companies authorized in the Services modality, to use PROSEC preferential duty rates for the importation of machinery and equipment.

• The duration of the IMMEX authorization is now subject to continued compliance with the obligations set forth in the Decree and in the corresponding authorization. Although it would appear that this duration is unlimited, one could interpret it as if any non-compliance with any of the aforementioned obligations is considered as an event for cancellation, even when the authority has not discovered such violation.

• It is now required to keep a detailed volumetric record of the temporarily imported oil and fuels used in the manufacturing process, and to evidence their usage under the Program.

• Companies that have secured more than one Maquila or PITEX authorization, as of the date of effectiveness of the Decree will have only one IMMEX Program. The goods authorized under each of those Maquila or PITEX programs will be automatically authorized in the new IMMEX Program. This would appear to operate as an automatic merger of programs for companies having more than one.

• As an important remark, the 2nd amendment to the Rules provides for companies importing on a temporary basis, the possibility of regularizing goods which legal importation term has elapsed, by using free trade agreements preferential duty rates, PROSEC duty rates or preferential duty rates under the Decree of Region or Border Zone.
Although this benefit is not included in the Decree, IMMEX companies can have access to it, since the main activity undertaken by said companies is the temporary importation of goods.
Legal Certainty
The Decree contains certain provisions that have not been regulated yet and will be further published by SECON or Hacienda. This creates legal uncertainty, since the rules that will apply in those specific cases are still unknown.

• Matters to be regulated by SECON:
SECON, with the prior opinion of Hacienda, will publish administrative rules
in the Federal Official Gazette with respect to the following:

a) Sensitive Goods:
i. The specific requirements that importers must comply in order to be entitled
to import on a temporary basis the goods listed in Annex II of the Decree;ii. The quantity limits for temporary importation of textile and apparel goods listed in Annex III of the Decree; the mechanism to determine such amounts; and the specific requirements for their importation.
The requirements and mechanisms mentioned in the paragraphs above must be published no later than February 28, 2007. In the meantime, the goods listed in Annexes II and III of the IMMEX Decree will continue subject to the provisions of the so called Sensitive Goods Accord, published in the Federal Official Gazette on October 30, 2003 and amended on January 30, 2004.
a) IMMEX under the services modality:
The activities that may be performed by companies that secure their Program under the services modality and the specific requirements that must be met in order to obtain a Program under that modality.

The activities and requirements mentioned in this paragraph must be published no later than February 28, 2007. In the meantime, the Accord that determines the activities that may be performed by the Services Maquila companies, published in the Federal Official Gazette on August 8, 2003 remains in force.
a) Granting of the IMMEX Program control number: Those companies that before the entrance into force of the IMMEX Decree had a Maquila or PITEX program authorization will be assigned with a new control number.

If at the time the IMMEX Decree becomes effective the Maquila or PITEX company complies with tax identification and registration requirements set forth in the Decree, SECON will assign them with an IMMEX control number and an effectiveness date without the need of further procedures.

The new control numbers and their effectiveness dates will be published in the Federal Official Gazette. In the meantime, Maquiladora or PITEX companies must use their corresponding Maquila or PITEX control numbers, which will be void as of July 1, 2007.

• Matters to be regulated by Hacienda:
The Decree now allows Hacienda to become a regulator of not only customs operational matters, but other matters through the Rules. The fact that the Rules can be easily amended by Hacienda and the benefits and requirements set forth therein may be changed at any time (e.g. from 2002 to this date, the Rules have been amended approximately 34 times) creates uncertainty.

The Decree provides that the following matters will be regulated in the Rules:
a) additional “benefits” granted to certified companies;
b) transfers to submanufacturing companies;
c) transfers or sales performed by IMMEX companies of the autoparts industry (OEMs) to terminal automotive companies;
d) benefits related with the inventory control systems;
e) specific requirements related with the geographical coordinates of the tax and industrial facilities’ domiciles;
f) transfers and movement of temporarily imported goods between controlling and controlled companies;
g) payment and deferral of duties;
h) conditions for the extension of the term to return or change the customs regime of temporarily imported goods when a Program is cancelled; and
i) requirements for value added tax refunds on certain specific cases.

Goods to be eliminated from Annexes II and III
The following goods will not be considered as sensitive goods as of the following dates, without the need of further publication:

a) Annex I of the IMMEX Decree:
As of January 1, 2008, the following tariff items will be eliminated from Annex I of the Decree:
0713.33.02 (Other white beans)
0713.33.03 (Other black beans)
0713.33.99 (Other beans)

b) Annex II of the IMMEX Decree:
As of January 1, 2008, the following tariff items will be eliminated from Annex II of the Decree:
0207.13.03 (Poultry pieces)
0207.14.04 (Cut poultry pieces)
0402.10.01 (Milk in powder with sugar)
0402.21.01 (Milk in powder)
0901.11.01 (Robusta coffee beans)
0901.11.99 (Other coffee beans)
1005.90.03 (Other yellow corn)
1005.90.04 (Other white corn)
1005.90.99 (Other type of corn)
1901.90.03 (Dairy food preparations)

Repealed Provisions
The following provisions will be repealed by the Decree:
• Provisions repealed as of the date of effectiveness of the IMMEX Decree:
a) Decree that establishes Temporary Import Programs for the Manufacture of Export Goods (the “PITEX Decree”);
b) Annexes of the Accord establishing specific requirements for the temporary importation of goods (the “Sensitive Goods Accord”); and
c) Accord that establishes specific benefits for certified companies that have a

Maquila or PITEX programs.
• Provisions to be repealed on specific dates:
a) Sensitive Goods Accord. This accord will be repealed as of the date in which SECON publishes in the Federal Official Gazette a new accord in this regard, and should not be later than February 28, 2007; and
b) Accord that determines the activities that may be performed by the Services Maquila companies. This accord will be repealed as of the date in which SECON publishes in the Federal Official Gazette a new accord in this regard, and should not be later than February 28, 2007.

Tax Aspects
As noted above, the Decree is carefully drafted to preserve the preexisting tax rules for existing maquiladora operations. Companies that were previously PITEX companies and that like maquildoras are now IMMEX companies will only obtain the full benefits from those tax rules if they adopt an appropriate structure for their operations.

Application of Existing Maquiladora Tax Rules
Special considerations should be given to the complex Maquiladora tax regime and its effects related to the IMMEX Decree. As mentioned above, an important issue to solve while drafting the IMMEX Decree was to secure for Maquiladoras the continuing application of special tax prerogatives granted to Maquiladora operations by multiple provisions of several tax laws. The Mexican Government worked with industry representatives in drafting a decree that expressly assures that result and that also preserves for all IMMEX companies the conditions that maquiladoras were required to meet in order to benefit from those tax rules.

The Maquiladora tax provisions that are now applicable to IMMEX companies generally include:
(1) Permanent Establishment (PE) and asset tax exemptions for foreign residents providing inventory and M&E to an IMMEX company as long as the IMMEX company itself complies with the special transfer pricing regulations set forth in the income tax law.
(2) Payments for maquiladora and submaquila services of IMMEX companies are subject to a 0% VAT rate as such services are deemed exported.
(3) Sales of goods used in the operations of IMMEX companies that are made between foreign residents and by foreign residents to maquiladoras are VAT exempt, subject to compliance with customs documentation procedures.
(4) All IMMEX companies are eligible for the income tax incentive on maquiladora operations provided by the Presidential Decree issued on October 30, 2003, allowing them to reduce their income tax liability for the year based on the amount calculated under the terms provided in the Decree, provided that they structure their maquiladora operations in the manner set forth under that Decree.

Specifically, from a tax perspective the IMMEX Decree has the following features:
• It defines all IMMEX programs to constitute maquiladora programs for purposes of the tax rules applicable to maquiladora operations.
• It introduces new language for purposes of the PE exemption as well as for the application of the benefits of the income tax reduction provided by the Presidential Decree of October 30th, 2003, that reinforces the preexisting requirement of the Presidential decree, providing that the maquiladora operations that will be eligible for such benefits are the ones that involve the use of inventory and M&E owned by the foreign resident.
This definition should generally cover maquiladoras IMMEX operations to the same extent that they were covered in the past, but service maquiladoras IMMEX operations, which do not use inventory or M&E, may not be covered by this definition and therefore may not be subject to the application of these tax regulations. It is important to mention that from a legal perspective the new definition for tax purposes of maquiladora operation included in the Decree (Article 33) cannot supersede the definition provided in other provisions such as the Income Tax Law. Therefore any companies granted protection by the Income Tax Law that do not fall under the definition provided in the Decree may be able to seek legal relief against the application of such definition.

• The new definition also provides clarification that IMMEX companies may use goods that are not under the temporary importation regime or national goods. This provision seems to promote local procurement.
• For purposes of the asset tax exemption, such exemption will continue to be applicable to foreign residents that (1) maintain inventories in Mexico for transformation by IMMEX companies or (2) provide to such IMMEX companies the use of foreign goods. As in the past, the asset tax exemption will still be limited in the proportion that such goods are exported, and will be subject to compliance with transfer pricing regulations by the IMMEX company.
• From a VAT perspective, the application of the 0% VAT rate on maquila and submaquila services will still be applicable to all IMMEX companies as long as the companies provide such services in the terms of their authorized program.
• IMMEX companies operating under the Certified Company regime will be entitled to receive VAT refunds within 5 working days as of the date of the application of such refund while companies that are not under such regime but that are operating under the IMMEX Decree will be entitled to receive such refunds within 20 working days as of the date the request is filed, in both cases subject to the rules that are issued by Hacienda. However, companies under the IMMEX Decree that are not Certified Companies will be able to apply for the ALTEX registration, and also obtain a fast VAT refund. The commitment from the Mexican Government was to maintain the application of the tax rules applicable to Maquiladoras. For the most part such commitment was honored with the publication of this Decree, which in our opinion also extends these benefits to IMMEX companies that were formerly PITEX companies, provided that they structure their operations as was required for Maquiladora operations in the past. The extended discussion within the government about the terms of the new decree has, however, highlighted the concerns of the tax authorities about the benefits of the Presidential Decree of October 30th, 2003, even though that benefit was not extended beyond what any company could have achieved in the past by obtaining a Maquiladora program. This suggests that it will be important for companies to be increasingly vigilant in seeking to preserve these current Maquiladorda tax rules, which have proved so important in reviving

Mexico’s export sector in the past three years. The need for such vigilance is apparent in the drafting by Hacienda of a recently proposed amendment to article 4-A of the Income Tax Regulations that seems to be oriented towards limiting the application of the permanent establishment exemption and perhaps even the application of the income tax benefit to certain maquiladoras engaged in maquiladora operations with residents of certain treaty countries, as opposed to granting the application of such benefits to maquiladora operations engaged with residents of all countries with which Mexico has a tax agreement with. This proposed drafting is now being revised by the Mexican Tax Authorities. Regardless of this, it is important to mention once again that under the terms of the IMMEX Decree, any company operating under that decree, including former PITEX companies, should be allowed to apply the tax rules applicable to maquiladora operations and to obtain the benefits of those rules as long asthey structure their operations to meet the requirements of the IMMEX Decree, which in most part follow the requirements that have applied to maquiladora operations in the past.

Concluding Remarks
Although there are some provisions in the IMMEX Decree that are beneficial to Mexico’s export sector, in our view the Decree falls short as a vehicle for improving Mexico’s competitiveness in that it fails to provide a modern and adequate regulatory environment to the Mexican export industry, in that it is full of non-defined regulatory requirements that have been detailed by the Federal Council on Regulatory Reform (COFEMER) in its concluding remarks on the IMMEX Decree Draft (publicly posted in COFEMER´s web page: http://www.cofemer.gob.mx/). In addition the IMMEX Decree, while eliminating some of the requirements provided in the old Maquiladora and PITEX Decrees, includes additional requirements, and does not simplify the regulatory environment per se. Apart from preserving the maquiladora tax regime, the only substantial objective that the Decree achieves is to merge the Maquiladora and PITEX concepts into a single regulatory program, in a highly complicated and sometimes confusing way that may be subject to wrongful interpretations by the authorities and companies.

IMPORTANT DISCLAIMER:

This document has been prepared by the Foreign Trade Practice Group of the Mexico offices of Baker & McKenzie for our clients and professional associates.

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CCC/EEF/13-nov-06